CHICAGO — Bally Total Fitness and its two largest shareholders were embroiled in a tug of war over control of the board of the directors and the management of the company, but after the annual shareholder meeting last month, all parties indicated they were pleased with the outcome and would focus on moving the company forward.

On Jan. 26, more than 100 shareholders and Bally employees packed a ballroom at the Renaissance Hotel in Chicago for the meeting. Many expected fireworks to erupt. However, when Karim Samii, president of Pardus Capital Management, Bally's largest shareholder, stood at the microphone to speak, he surprised more than a few shareholders with his call for a truce.

“There's been enough fighting happening between the shareholders, and it's time for peace,” said Samii, whose New York-based hedge fund owns 14.4 percent of Bally's shares and spent millions of dollars waging a proxy fight. “Let my vote speak for itself.”

As of press time, preliminary results show that shareholders supported Pardus' proposal to elect three new board members — Charles Burdick, Barry Elson and Don Kornstein. Nearly 85 percent of the votes cast at the meeting and 60 percent of the outstanding shares supported Pardus' slate of directors. Bally had supported the nomination of Burdick and Elson but objected to the election of Kornstein due to his longstanding ties to Lee Hillman, former Bally CEO. Samii said the vote represented a clear mandate for corporate reform and a fair strategic sale process.

“We and the other shareholders want the company to move past the recent conflict and focus on building shareholder value through the sales process,” he said. “Bally's directors have said they hear us, and we hope they will move forward constructively with the new directors to create that value.”

A majority of shareholders also voted for Liberation Investment's proposal to oust Bally CEO Paul Toback, but the measure failed because it did not receive the necessary 75 percent of the votes.

Still, Emanuel Pearlman, director of Liberation, the second largest shareholder, called it a great day for corporate democracy.

“About 55 percent of the shareholders supported our proposal, which sent a clear message to the board and the management that the shareholders weren't happy with the status quo,” said Pearlman, who was allowed three minutes to address the shareholders during the annual meeting.

New Faces

The election of the three new board members means that one of the current board members — Eric Langshur, who led the company's audit committee in the process of restating financials — lost his board seat. Martin Glotzer, a shareholder and a corporate governance advocate, said that Bally's board could have up to 17 board members so the board could vote to return Langshur to the board.

“I would not be happy with that,” Pearlman said about that possibility. “It would dilute the new members' say on the board.”

Pearlman has suggested to Bally that Kornstein be appointed leader of the special committee to enhance shareholder value through the sale of Bally. Mark Wattles, Bally's third largest investor and the founder of Hollywood Entertainment, agreed with Pearlman.

“Based upon my conversations with Mr. Kornstein and other sophisticated investors that I know who have had dealings with Mr. Kornstein, I believe he would be an excellent addition to the board and would fairly represent the interests of all shareholders,” Wattles stated in a Jan. 25 letter to Toback.

After the one-hour meeting, Kornstein relaxed in a chair outside the meeting room and said he looked forward to working with the other board members and management to pursue strategic shareholder objectives. Whether or not he will lead the special committee remains to be seen. John Rogers, chairman and CEO of Ariel Capital Management, a Chicago-based money management firm, currently directs this committee and is working with the Blackstone Group and JP Morgan Securities to explore a sale of the company. Rogers said he welcomed the three new board members and hoped to work with them to lead the company's operational turnaround.

“While a number of forces and agendas appear to have been at work, it is clear from today's vote that Bally's investors intended to send a strong message about the importance of board leadership at the company,” he said.

Burdick, one of Bally's trio of new board members, plans to serve as an active, engaged board member during his three-year term, he said.

“Bally is a great company and has been around a long time,” said Burdick, who flew from London to Chicago for the meeting. “Now that they have their accounting issues behind them, it's an excellent time to join the board.”

Unlike Pearlman and other investors who supported the removal of Toback as CEO, Burdick expressed full support for Toback.

“Paul knows the company very well, and he gets a thumbs up from me,” he said. “During the meeting, he provided a nice presentation of where the company has been and where it's going. It was well handled, and everyone had the chance to have their say. While everyone had an agenda, the meeting was handled well, and Pardus and Liberation presented their opinions in a non-confrontational way without getting personal.”

Toback Charges Ahead

Jan. 26 could have been one of Toback's final days as CEO of Bally, but enough shareholders agreed with Richard Kahan, a shareholder in Wilmette, IL, to keep him on board. Kahan said Toback had Bally moving along the right track.

“I'm very excited about the future of Bally,” he said. “It has the design and infrastructure in place to make its clubs more successful and to remain a dominant player in the market.”

Another shareholder, Jim Booker, said his relationship with Bally stretched back 20 years. He sold his American Fitness Clubs to Bally in 1990 and has owned stock for the past five years. After the meeting, he talked to other shareholders and said many shared the same view about ousting Toback.

“A lot of the shareholders all had the same question — who would we replace him with?” he said. “We concluded that Bally had made great strides over the past few years, and we need to stick with them. Some people are ready to throw out the baby with the bath water, but that can be very destructive.”

Jane Riddell, a shareholder who flew to Chicago from Toronto, agreed. Since Toback has only served as CEO for three years, she's willing to give him more time to see what he can do for Bally.

Toback has a significant supporter in Wattles, who has a 9 percent stake in the company. When Wattles announced in his Jan. 25 letter that he would support Toback, it significantly weakened Liberation's chance to oust the Bally CEO.

In Wattles' letter, he said it wasn't clear how much of the responsibility for Bally's problems resided with current management, but a foundation was being laid for a successful turnaround. Now that the annual meeting is behind Bally, he hoped the company would refocus its attention on improving operations to benefit shareholders whether Bally remains public or goes private. Following the shareholder meeting, Wattles said it was up to management, not shareholders, to help the company succeed.

Bally's turnaround plans include build-your-own and pay-as-you-go memberships, Toback announced at the meeting. The company also plans to shift its focus from sales to service by having the sales team meet with potential members in a juice bar by the front desk rather than in private offices. In addition, Bally is adding products and services in weight loss and nutrition, converting retail stores within the clubs into space for Pilates and tanning and expanding its martial arts training program.

Franchising will also be part of Bally's strategy to improve the balance sheet. The company, which is still under investigation by the Securities and Exchange Commission and which recently sold Crunch to Marc Tascher for $45 million, is selling franchises nationwide and worldwide.

Modernizing its clubs will also be a way for Bally to turn the company around. During the meeting, Toback unveiled Bally's new club model, which features brighter colors and a more open floor plan. Booker said the new club model is right on target.

“Just as K-Mart had all of its problems and then began to turn stores around and charge ahead, Bally got too big, lost control and is now redoing its image,” he said. “There's still a lot of positive feelings about Bally, and if they redo their image, they can deliver a tremendous amount of people.”

To improve its image, Bally launched an advertising campaign that shows real people who achieved real results. After showing the commercials to the attendees, Toback took questions from shareholders. A question from shareholder Lotty Blumenthal about how Toback planned to improve the quality of existing operations elicited applause from several shareholders. Toback responded by saying that Bally plans to invest $8 million in 2,400 new treadmills at Bally clubs across the country.

As Bally moves forward, the fitness chain will continue to work with its advisors to explore the sale of the company, gear up for a new year with a new board and work for peace with its shareholders rather than a tug-of-war.

Fast Facts: A Look Inside The Bally Shareholder Meeting

Who: More than 100 attendees, who were mostly dressed in dark business suits, wore name tags stating whether they were shareholders, Bally employees or members of the press. The room was set up for 140 people, and only a few seats remained empty. About half of the attendees worked for Bally. According to sources, the meeting had the best turnout of any previous meeting, which drew only a handful of attendees. CEO Paul Toback led the meeting from a table at the front of the room and sat next to Carl Landeck, senior vice president and chief financial officer, and Marc Bassewitz, senior vice president, secretary and general counsel.

What: After filing its financial statements with the Securities and Exchange Commission, Bally arranged this annual shareholder meeting to meet its obligations as a publicly traded company. It was Bally's first annual meeting since July 2006.

When: The meeting began at 8:30 a.m. central time on Thursday, Jan. 26, and lasted a little more than an hour.

Where: Salon A of the Renaissance Hotel, which was three miles from the Chicago O'Hare airport, two blocks from Bally's corporate headquarters and a few blocks from Bally's Cumberland club, served as the location for the annual meeting.

Why: Following the opening of the meeting and the introduction of company directors and officers, Bally shareholders voted on five key proposals including the election of directors, the approval of the 2006 equity compensation plan (which would have made 1.75 million additional shares available to Bally employees), the ratification of the appointment of KPMG LLP as the independent auditor, Liberation's proposal to oust Toback and Pardus' proposal to add three new board members. Shareholders could vote on the telephone, on the Internet, through the mail or in person at the shareholder meeting. As of press time, the preliminary votes showed that Pardus' slate of directors was accepted, Liberation's proposal to oust Toback was rejected and the equity compensation plan was voted down. IVS Associates, the independent election inspector, was tabulating the final results as of press time.

Meet Bally's New Board Members

Charles Burdick, 54, served as CEO of Hit Entertainment, a London-based production company of children's TV programming until July 2005 when it was sold to Apax Partners, a private equity firm. From 2002 to 2004, he served as CEO of Telewest Communications Group Ltd., the second largest cable company in the United Kingdom, and from 1996 to 2002, he served as the CFO.

Barry Elson, 64, is acting CEO of Telewest Global Inc., the successor to Telewest Communications plc. He served as COO of UrbanMedia Communications Corp. in Alpharetta, GA, between 2000 and 2003, and was president of ConectIV in Wilmington, DE, from 1997 to 2000. From 1983 to 1997, he was executive vice president at Cox Communications in Atlanta.

Don Kornstein, 53, is the chairman and CEO of Alpine Advisors LLC, a strategic, management and financial consulting firm. Prior to founding Alpine Advisors, he served from 1994 to 2000 as the CEO, president and director of Jackpot Enterprises Inc., a Las Vegas-based gaming company. He also worked as an investment banker at Bear, Sterns & Co. Inc. from 1997 to 1994, according to Shuffle Master Inc.